Compared to the USA, the Czech Republic has a more negative base exchange rate in real terms, due to the smaller difference between the base rate and inflation. In the third quarter, the Czech economy fell by 0.4 percent, and further decline is expected in the next quarter as well. To the eye, the situation may appear that the rates, increased by the previous banking council of the domestic central bank, are taking over.
A slowing mortgage market, an incipient housing market correction, stagnant gross domestic product (GDP) growth and month-on-month inflation may seem like the current level of interest rates is set.
However, the devil lurks in the labor market, which continues to show signs of overheating. At 3.5 percent, it is still below standard structural unemployment. Its growth of 0.1 percent month-on-month does not indicate that there should be a cooling down.
In this period, unemployment normally increases in this way due to the end of seasonal jobs. The labor market is currently a litmus test that can give us an indication of the direction inflation will take in the coming year.
A wage-inflationary spiral is still in play given upward pressure on wages. By pressing an air-filled inflatable balloon, the wall at the weakest point will roll out, which is currently the Czech labor market.
The CNB forecast for 2023 still predicts double-digit inflation at the level of ten percent and a drop in the economy by 0.7 percent. Therefore, the Central Bank is already anticipating and steering the Czech economy in that direction with its steps into a downright stagflationary state. In advanced democratic economies, it is common to respond to this situation by further raising rates.
It’s always better to step on the brake more before a corner that you can’t see, and then slow down. According to its statements, the domestic central bank apparently completely ignores this lesson.
The prospect of a possible rate cut is therefore passé until at least the middle of next year, precisely because of, let’s say, the CNB’s “dovish” approach. As a result of no further rate increases, it may happen that double-digit inflation will settle in the Czech economy until the year after next.
The two percent inflation target in 2024 will remain just the wishful thinking of the domestic central bank’s expert forecasts. Next year will be a year of high inflation and falling gross domestic product. We can only hope that the decline of our inland and open economy will not be deep.
The author is the CEO of the real estate portal Videobydleni.cz